A combination of new-pipeline development, lower capex by producers, production shut-ins, and changing expectations for future production has significantly altered crude oil and natural gas market fundamentals in the all-important Permian Basin. Just over a year ago, Permian production was rising steadily and oil and gas pipelines out of West Texas were running at or near full capacity. Since then, nearly 2.2 MMb/d of incremental crude takeaway capacity has come online, and production dropped by about 700 Mb/d before rebounding somewhat in recent weeks. As for gas, some takeaway constraints remain, but they are limited to when pipelines are offline for maintenance, and will be alleviated when new pipelines start operating in 2021. Today, we discuss the recent downs and ups in Permian production, takeaway capacity additions, and the resulting impacts on markets and market participants.
As 2019 was drawing to a close nine months ago, Permian producers knew that big changes would be coming in 2020. But they had no idea what they were in for. They expected steady increases in crude oil and natural gas production, driven by what was then $62/bbl West Texas Intermediate (WTI) and by rising demand for gas from a slew of new liquefaction/LNG export facilities along the Gulf Coast. Producers also were confident that a trio of new crude pipelines from West Texas to the Corpus Christi area — Cactus II, EPIC Crude, and Gray Oak — would ease takeaway constraints out of the Permian, and that while it would take longer, gas-takeaway constraints would be alleviated too as new Permian-to-Gulf Coast pipelines started up in 2020 and 2021.
However, what they didn’t anticipate — how could they? — was a global pandemic that would substantially slow economic activity in much of the industrialized world, especially the U.S.; annihilate demand for jet fuel, motor gasoline, and (to a lesser degree) diesel; and spur the U.S. refinery sector to reduce their utilization rates to less than 70%. Nor could they predict that, just as stay-at-home orders were being implemented, Saudi Arabia would initiate an oil price war with Russia (though they later pulled back), or that WTI prices would actually go negative (if only for one day). Then there’s the gas side of things. Who would have guessed last New Year’s Eve that U.S. LNG export volumes, which had been rising steadily since 2016, would fall by more than half in the first few months of 2020, causing a sharp drop in U.S. gas demand in the process? Don’t forget that Permian producers, with their vast volumes of associated gas, have long been banking on the LNG export market to absorb a big share of their incremental gas output.
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About the song
"Whirlwind" was written by David Kelly, and was recorded at Sun Studios in Memphis by Charlie Rich in 1958. Released in August of that year, the rollicking, piano-driven rockabilly song would be Rich's first single on the Sun label. It appeared as the second song on Rich's first Sun album, Lonely Weekends, which was released in 1960. Sun Records owner Sam Phillips said that Rich "had the potential to be the next Elvis," and used Rich as a piano player for quite a few sessions at Sun. The song "Lonely Weekend" became a Top 30 single for Rich in 1960, but it was the only success he had while at the label. Rich later claimed that he never received a royalty check from Sun while he was employed there.
Charlie Rich was an American country music singer, songwriter, and musician. Under the tutelage of producer Billy Sherrill at Epic Records in Nashville, Rich started focusing his music more on the "countrypolitan" ballad sounds coming out of Music City in the early 1970s. Then nicknamed the "Silver Fox" because of his graying hair, Rich hit it big with two consecutive #1 singles in 1973: "Behind Closed Doors" and "The Most Beautiful Girl." Charlie Rich released 12 studio albums, 11 compilation albums, and 41 singles. He had 10 #1 country singles during his career, and won three Academy of Country Music Awards, three American Music Awards, five Country Music Association Awards, and two Grammy Awards. Rich died in July 1995 at the age of 62.
